In pursuing its own interest, an oligopoly firm will decide to increase production by 1 unit as long as

Question

Quizplus · Accepted Answer

In an oligopoly market, when a firm increases its production by 1 unit, two effects will happen. The first effect is the output effect, which is the increase in total revenue due to the additional unit sold. The second effect is the price effect, which is the decrease in price resulting from the firm's attempt to sell more units. If the output effect is larger than the price effect, the firm will increase its production since the additional unit sold will increase total revenue more than the price decrease reduces revenue. Therefore, the correct answer is C, i.e., the output effect is larger than the price effect.

In Pursuing Its Own Interest, an Oligopoly Firm Will Decide